Tuesday, February 28, 2006

Over at the Sinners blog, Reductionist makes an interesting point about wi-fi networks. Why, he asks, don’t wi-fi providers require password protection by default? After all, doing so would keep out some free-riders, and thus possibly generate some additional customers for the service provider. Reductionist’s answer is twofold: First, the benefits of excluding free-riders are not concentrated on the excluder, but spread out among all service providers who might get the new customers. Second, the costs of enforcement are high because non-techie customers need lots of technical support for password/network problems. Reductionist deems this situation a “beneficial market failure,” because the inability of providers to exclude free-riders leads to the happy outcome of easily accessible free wi-fi access.

A problem with Reductionist’s story, as he notes in an update, is that wi-fi networks aren’t usually provided by cable companies or other ISP’s. The wi-fi network in my apartment was installed by me; it uses my cable internet connection, but my cable company doesn’t provide the wi-fi capability. But Reductionist is still making a good point: it can sometimes be desirable to have imperfectly enforced property rights.

When? In cases where the marginal cost of serving more customers is zero – or in econ parlance, when services are non-rivalrous. In such cases it’s more efficient to allow use by some non-payers, because doing so creates added benefits without raising costs. This is true with wi-fi so long as there aren’t enough users to cause bandwidth congestion. It’s also true for intellectual property: it costs nothing for more people to use an idea (listen to a song, use a technique, etc.). That’s why it’s a good thing for copyright law to have a fair-use exception, even though it constitutes a loophole in the copyright holder’s ability to exclude non-payers.

A corollary: private enforcement efforts can be excessive, and that can constitute a market failure (with the usual caveat that any market failure must be weighed against the failings of other institutional arrangements). Apparently this is not the case with wi-fi, because the private enforcement cost is too high. But it could turn out to be true of Digital Rights Management (DRM) – that is, efforts by recording labels to make duplication of their copyrighted works more difficult. DRM can reduce the utility and convenience of the purchased works even for those who have already paid, as well as placing a burden on fair use. (Doug Lichtman has an interesting post on DRM; his assessment is that it probably won’t be that big a problem.)

Opponents of IP might use this argument to justify eliminating IP altogether. This doesn’t directly follow; just because enforcement can be excessive doesn’t mean the optimal amount of enforcement is zero. Enforcement assures that at least somebody pays (presumably those who place the highest value on the service) and thereby provides an incentive to incur the up-front costs of service provision. However, it’s correct to say the argument here weakens the case for IP, because if private enforcement alone can be excessive, private plus public enforcement can be really excessive. (Even so, a case could be made that public enforcement is superior to private enforcement if it avoids some of the inconveniences associated with private enforcement. Copyright protection that targets the true free-riders might be preferable to DRM that inconveniences the payers.)

In any case, any IP-opponent who deploys this argument must be prepared to explain why it should not apply to other excludable but non-rivalrous services, such as cinema seats on a weekday afternoon. Seats that go empty, despite the existence of willing viewers who value the seats at a positive value less than the matinee price, are a pure waste. A few kids sneaking in without paying would diminish the waste, and thus it might be good to have less rigorous enforcement of the theater’s property rights. The same reasoning that above supported elimination of public IP-enforcement would here support elimination of public enforcement of the theater owner’s material property rights (on weekday afternoons). If the theater calls the police to report trespassers, the police should hang up.